Is It a Stock Market Rally or a Dollar Devaluation? 34 comments
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The chart below (click to enlarge) shows the SPX (vertical scale) vs the dollar bullish ETF UUP (horizontal scale) for the year to date:
Fully 80% of the movement in the S&P can be explained by the movement in the dollar index.
Statistical analysis confirms the visual impression that the two variables are moving in lockstep. In the chart below (click to enlarge) we see the rolling three-month correlation between daily returns to SPX and the dollar bullish ETF UUP, which mimics the dollar index DXY.
Something ominous is at work here. Typically, a stronger dollar goes together with a stronger stock market. That is what we observe prior to the bank bailout last fall. Starting in the third quarter of 2008 and going to the present, the correlation turns sharply and persistently negative. A cheaper dollar means higher stock prices, as US assets are marked down for global investors.
What we have is not a stock market rally but an adjustment to global market prices. Fully 80% of the movement in the S&P can be explained by the movement in the dollar index.
That is a profile well known to emerging market investors. Whenever the Brazilians would pull another currency devaluation, stock prices rose to compensate, as tradeable assets floated up to world market prices. The bank bailout has made Americans poorer relative to the rest of the world and created the illusion of a stock market recovery.
That does not necessarily mean that inflation will return to the US, as some analysts believe. Foreign investors are not likely to buy homes in Cleveland (although the dollar devaluation certainly should help real estate prices in New York or San Francisco). And the combination of high unemployment and deferred retirement (greeter jobs at Wal-Mart (WMT) will be in great demand) will keep wages down. The price of international tradeables, though, will affect US inflation, which is why I continue to recommend classic commodity hedges (including gold and oil) rather than TIPS.
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This article has 34 comments:
stockcharts.com/h-sc/ui?s=$SPX:$USD&p=D&...
I appreciate the informative opinion.
If you want to chart the excess performance of the S&P vs USD, you need to divide $SPX by the "USD bearish fund" (inverse):
stockcharts.com/h-sc/u...
Basically David Goldman is correct, the S&P has not moved that much as it seems this year in real terms.
I would also like to add that the sentiment on the Dollar is currently very bearish...While I believe that the only way the U.S. Dollar will go in long term in Down...A reversal (hence a stock market correction) cant be ruled out in the near term...
The former is $SPX:UDN (inverse, the link that I provided), the latter would be $SPX:UUP (non-inverse)
On Aug 23 03:47 AM Pink Panther wrote:
> If you want to chart the excess performance of the S&P vs USD,
> you need to divide $SPX by the "USD bearish fund" (inverse):
> stockcharts.com/h-sc/u...;p=W&b=2&a...
It's the monsterous amount of money that the Fed and others have pumped into the system.
Very little of it has found its way into an economic recovery, rather the majority is going into investment vehicles. We know the banks e.g.GS can't make money the old fashioned way - everybody is trading.
The risk trade in currencies - especially the AUS$ and CAD$ has been prevelant and dominated by two forces:
1) the US stock market - positive moves indicating the rest of the world will follow economically (let's not pursue that pipe dream)
2) the price of commodities, especially oil
Yes, the weak US$ makes US assets cheap, but the perception clearly is that the profit potentials elsewhere are greater even with the US$ devaluation factored in.
We are only now starting to see some decoupling. For the last few months, if you looked at 10 minute charts of the US stock market, oil, and the dollar, you saw that the currencies i.e the US$, were following and not leading.
The only area of the globe that needs US products and services is Asia. The S&P is just anticipating Asian demand responding to a cheaper US dollar.
As ancient Baby Boomers delay retirement to keep working, and Boomer progeny try to enter the work force, there will be more downward pressure on US wages.
Congress will continue putting downward pressure on US salaries.
Even the prices for US design, engineering, production, logistics, marketing, financial and professional services are becoming competitive.
When the dust settle, the US will be almost able to compete on labor costs with China.
The downward pressure on US wages and salaries will reduce federal tax receipts which will worry China even more.
I’d like to see a David Goldman chart showing the comparable correlation between the Euro and the S&P.
1. The dollar is trash
2. Gold is very overvalued compared to production cost.
3. Real estate is still overvalued, because much of its "value" is based on leverage, rather than income.
What is undervalued is the equity of well-managed US public companies that have global franchises, little debt, and a legacy of innovation in markets that must grow, regardless of economics.
A few months ago, I decided to go heavily into SYK (Stryker). It has the best portfolio of products for artificial joints, and a balanced portfolio of other healthcare products.
It is selling at 14 p/e, and 14 future p/e estimates. If you read my posts, you know I advocated strongly for the "can't miss" financial sector, especially Bank of America, and for that Brazilian ETF which emphasizes the Brazilian consumer market -- BRF.
Follow me now and recycle those profits to SYK. It's a great hedge against a declining dollar, and demand from crippled boomers will outweigh any pricing concerns from US healthcare "reform."
>
> Follow me now and recycle those profits to SYK. It's a great hedge
> against a declining dollar, and demand from crippled boomers will
> outweigh any pricing concerns from US healthcare "reform."
>
>
>
>
>
>
On Aug 23 10:07 AM wcrxlp editorial collective wrote:
> A cheapening US dollar makes US exports more competitive.
>
> The only area of the globe that needs US products and services is
> Asia. The S&P is just anticipating Asian demand responding to
> a cheaper US dollar.
>
> As ancient Baby Boomers delay retirement to keep working, and Boomer
> progeny try to enter the work force, there will be more downward
> pressure on US wages.
>
> Congress will continue putting downward pressure on US salaries.
>
>
> Even the prices for US design, engineering, production, logistics,
> marketing, financial and professional services are becoming competitive.
>
>
> When the dust settle, the US will be almost able to compete on labor
> costs with China.
>
> The downward pressure on US wages and salaries will reduce federal
> tax receipts which will worry China even more.
>
> I’d like to see a David Goldman chart showing the comparable correlation
> between the Euro and the S&P.
tinyurl.com/lct5oo
If they don't pay, you will (gladly), even if you had to sell your house to do it.
The alternative is a crippled and painful retirement. The business of SYK is "can't miss."
On Aug 23 11:21 AM pockyclips 2020 wrote:
> I'm probably one of those "crippled boomers" that will need one of
those titanium gizmos in the future. I doubt that Gen X'ers and beyond will be willing to pay for them if they have to go without basic
health care.
They believe that Americans will NOT notice the devaluation of the US dollar. They think that people will only see that the Dow Jones is at say 12,000 and that their homes are rising again in nominal terms. And that they won't notice that it costs $10 for a loaf of bread, $20 for a gallon of gasoline,etc.
So if you divide a bullish ETF against its inverse counterpart (which should be Y = 1/X), you basically get X squared, not '1' (straight line).
Therefore you have to compare UUP against the USD:
stockcharts.com/h-sc/u...
...and thas line IS almost straight; it has been within 3% for the past 2 years, which is a good performance record for UUP.
On Aug 23 11:35 AM E Nuff Sed wrote:
> Unfortunately Goldman's analysis is flawed because of the use of
> UUP (Dollar bullish ETF). UUP is affected by volatilty and "decay".
> Let me demonstrate. If you plot UUP vs UDN one would expect a some
> what straight line - but over the course of a year the return has
> "decayed" about 15%.
> tinyurl.com/lct5oo
stockcharts.com/h-sc/u...
stockcharts.com/h-sc/u...
Another experiment - look at this chart of USD vs. other currencies.
tinyurl.com/l3znzx
Also you may want to compare XSP (S&P 500 hedged against Cdn $) vs. S&P 500.
You have that backwards. The dollar was at it's weakest point historically while the stock market was at it's all time high.
During the March lows the dollar has gained much strength.
Swing and a miss!
There are really 2 distinct economies we have to look at. There is the financial economy where money can be made and lost betting on stock price direction. And there is the real economy where money is made by producing and selling products that we and the world need. "Investors" buy stock in companies to earn a share of their profits from operations. "Traders" buy stocks to earn money by selling higher (or shorting), without regard for the underlying profitability of the company.
There are trillions of US$ loose in the world and there are only so many safe places to park them when there is fear for the future value of the currency. I personally think that buying shares of real companies with real earnings is a good safe place to park your investment dollars. If others share this view then the worse the dollar looks the better these companies will look, especially US based global companies who sell into diverse global markets.
So the reverse correlation between dollar sentiment and market valuations may be at least partly caused by hedging your currency holdings by buying real performing assets, like dividend paying companies.
On Aug 23 02:04 AM Lumuc wrote:
> What happens to the US stock market then? Does it keep going up
> as the dollar decreases in value? At what point do the US markets
> collapse given the fiat money the FED created out of thin air?<br/>I
> appreciate the informative opinion.
The "alternative" may actually be a painful and crippled life working a part time job to make ends meet. Sell the house for hip replacement so that retirement can be enjoyed? Indeed....
Have you been selling financial products all your life?
On Aug 23 12:05 PM lorddarley wrote:
> <<I doubt that Gen X'ers and beyond will be willing to pay for them
> if they have to go without basic health care.>>
>
> If they don't pay, you will (gladly), even if you had to sell your
> house to do it.
>
> The alternative is a crippled and painful retirement. The business
> of SYK is "can't miss."
>
The scheme being carried out is very sophisticated. Right now, strangely enough, because we are still very much inside a depression, the "dash for cash" that started last summer, around mid-July, and got really severe after the Lehman Brothers collapse, is still ongoing. There is still an intense, though temporary, demand for dollars, in world markets. The demand exists because dollar based real estate oriented asset prices are collapsing, and European banks have a lot of dollar denominated assets, which they obtained using leverage, or borrowed dollars. An example is RBS, which has some $40 billion in structured notes.
The Fed and the corrupt cabal of banksters who control it used this dollar demand to create an artificial rally. The Fed provides money to the PPT banks to buy stock index futures, which are purchased, in all probability, using programs similar to the manipulative Goldman Sachs proprietary trading software that the U.S. attorney's office warned "could be used to unfairly manipulate markets if it gets in the wrong hands." The program buys the index futures timed in a way that jibes with the technicals of the market, persistently pumping prices up in the futures markets. Meanwhile, arbitragers in the real cash market will even out the difference between the cash value of the market and the futures. In this way, the Fed can pump up the market using the least capital, since futures can be purchased at high leverage.
The main problem is that the newly printed cash (or cash from sequestered reserves printed in September, 2008) is eventually released into the money markets after the futures are purchased. That means more dollar supply for the same demand. Because they have pumped tens of billions of dollars into this program, over the course of this rally, they have overwhelmed the increased dollar demand in Europe, and the dollar has fallen substantially. If they had done the same thing, at almost any other time in history, the U.S. dollar would have utterly collapsed, and we would already be suffering from hyperinflation. However, they are getting away with a relatively small fall in the dollar, because of the temporary conditions that now prevail.
Now, you know the rest of the story about why the dollar has gone down only 18% while the markets are up by 52%.
On Aug 23 12:05 PM lorddarley wrote:
> <<I doubt that Gen X'ers and beyond will be willing to pay for them
> if they have to go without basic health care.>>
>
> If they don't pay, you will (gladly), even if you had to sell your
> house to do it.
>
> The alternative is a crippled and painful retirement. The business
> of SYK is "can't miss."
>